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Markets React to Tension in Korea

Tuesday, May 25, 2010

South Korean President Lee Myung-bak walks with defense minister Kim Tae-Young for a press conference at the War Memorial on May 24, 2010 in Seoul, South Korea.
(Getty Images)

Traders dumped stocks today as North Korea declared it would sever all ties with South Korea and ordered its military to combat alert. South Korea announced it would freeze trade with North Korea on Monday, and blamed it for sinking a South Korean warship.

The Associated Press reports that the Dow Jones fell nearly 190 points, or 12 percent, earlier today, and world stock markets tumbled. The Dow and broader stock indexes also fell about 2 percent, and the euro approached a four-year low.

U.S. stocks eventually recouped earlier losses. The Dow ended the day at 10,043, with a loss of 22 points, and the Nasdaq fell 2 points to close at 2,210.

"Market participants feel like they're walking on eggshells," Oliver Pursche, of Gary Goldberg Financial Services, told The AP. "Every small piece of potentially bad news is being exaggerated and mentally being fast-forwarded to the worst-case scenario."

Tensions have been building on the Korean peninsula since a South Korean navy ship called the Cheonan sank on March 26 after it was struck by a torpedo. Forty six South Korean sailors died. An international investigation of the incident revealed that North Korea may have been responsible for the attack. South Korean officials allege it found a North Korean marking on the torpedo that struck the Cheonan.

On Monday, South Korea declared that it would suspend trade with North Korea. Today, North Korea said it would do the same, and that it would expel a group of South Koreans working at a factory in Kaesong, according to The AP. On Monday, the White House backed South Korean President Lee Myung-bak's statement and demanded that North Korea also punish those responsible for the attack, and stop its belligerent and threatening behavior.

UPDATE SINCE THIS STORY WAS FIRST POSTED: This story has been updated to reflect today's closing numbers on Wall Street.